On a month-over-month basis, home prices were up 1.02 percent, beating expectations of a 0.8 percent rise.

The December number was reading was revised up to 0.92 percent, from the initial reading of a 0.88 percent MoM rise.

Both the 10 and 20-city composite indices had their highest increases since summer 2006. "This marks the highest increase since the housing bubble burst," according to David Blitzer Chairman of the Index Committee at S&P Dow Jones Indices.

Bank of America's Michelle Meyer and Justin Borst say that a "positive feedback loop has begun". They argue that when people think home prices are rising, they think they will keep doing so and credit conditions will improve, and this increases demand for homes.